Mr. Chairman and members of the Subcommittee, thank you for providing
the Commodity Futures Trading Commission with the opportunity to
discuss agricultural trade options before the Subcommittee today. I am
confident that today's hearing will have a dual benefit: informing
the Subcommittee about an issue important to the agricultural
community and assisting the Commission in its current consideration of
whether to lift the ban on agricultural trade options. Accompanying me
are Commissioners John E. Tull, Jr., Barbara Pedersen Holum, and David
D. Spears.

My testimony on behalf of the Commission will focus on three areas: a
history of options on agricultural commodities; a discussion of the
Commission's staff White Paper on agricultural trade options; and
a description of the Commission's process for reviewing whether to
lift the ban on agricultural trade options.

Options are transactions that grant one party the right, but not the
obligation, to buy or to sell a commodity or other interest at a
certain price. Options trading can be broken down into two broad
categories ­- exchange-traded options and off-exchange options.
Trade options are off-exchange commodity options which can be offered
only to a commercial person or entity solely for purposes related to
that person's business. Trade options are currently prohibited on
certain agricultural commodities listed in the Commodity Exchange Act,
although permitted on other commodities.

If agricultural trade options were permitted, a corn farmer could
purchase an option from an elevator to sell the farm's anticipated
production of corn at a certain price. Similarly, a wheat miller could
buy an option to purchase wheat from a grain dealer for processing at
a certain price.

Agricultural options -­ both on- and off-exchange -- were traded
in the United States at least from the time of the Civil War until the
1930's. However, concerns about fraudulent sales practices,
failures to perform on over-the-counter obligations, and the use of
exchange-traded options to manipulate the prices of agricultural
commodities prompted numerous industry and government efforts to limit
or to eliminate trading in agricultural options. In 1936 Congress
banned all sales of options on certain agricultural commodities listed
in the Commodity Exchange Act. Today, those listed commodities include
the major grains, oilseeds, cotton and livestock products, among
others.

Congress's ban did not apply to all commodities, and fraud and
abuse in options markets in non-listed commodities, such
as gold, was one of the reasons for creating the
Commodity Futures Trading Commission in 1974. The 1974 amendments to
the Commodity Exchange Act vested the Commission with broad-based
authority over both on-exchange and over-the-counter options markets
in non-listed commodities, but left in place the 1936
ban on options in the listed commodities. Shortly after its creation,
the Commission adopted rules that exempted over-the-counter trade
options in non-listed commodities from most regulatory requirements.
However, the Commission retained the power to enforce fraud and
manipulation prohibitions as to such trade option transactions.

Despite historical problems associated with commodity options, there
remained considerable commercial interest in their use. Accordingly,
in 1981 the Commission instituted a pilot program for exchange trading
of commodity options in commodities other than the listed agricultural
commodities. In 1982 Congress lifted the 1936 statutory ban, allowing
the Commission to permit options in the listed agricultural
commodities. The Commission permitted exchange trading in these
agricultural options in 1984. However, the regulatory ban on
agricultural trade options was maintained.

The reintroduction of exchange-traded commodity options has been a
commercial and regulatory success. Neither they nor trade options on
the non-listed commodities have posed unusual regulatory problems.

Although the Commission has considered lifting the regulatory ban on
agricultural trade options several times over the last 15 years, the
Commission has not acted to reintroduce trade options on the listed
agricultural commodities, choosing instead to leave the ban in place.
There have been deep divisions within the agricultural community on
the issue. Opponents of lifting the ban have expressed concerns over
possible fraudulent activity and suggested that such contracts might
result in confusion in the producer community, particularly regarding
the delivery obligations. Nonetheless, there also have been repeated
calls throughout the years for the Commission to permit broader use of
trade options in the agricultural sector.

Earlier this year the Commission asked its Division of Economic
Analysis to prepare an analysis of the issues surrounding agricultural
trade options. The Commission's request in part reflected
increased producer interest in additional risk management tools in
light of the significant changes in U.S. farm policies enacted in the
1996 Federal Agricultural Improvement and Reform (FAIR) Act. In May
1997, the Division's staff completed a White Paper entitled
"Policy Alternatives Relating to Agricultural Trade Options and
Other Agricultural Risk-Shifting Contracts," a copy of
which is attached to our testimony.

The White Paper analyzes the current regulatory environment, recent
developments in agriculture that have expanded the need for
risk-shifting strategies, the benefits and risks of agricultural trade
options, and possible ways to strike a balance between such benefits
and risks. Based on this analysis, the White Paper concludes with a
series of staff recommendations for the Commission to consider.

A central benefit identified in the White Paper is that lifting the
ban on agricultural trade options potentially would provide producers
and end-users with a greater variety of risk-management tools. Other
benefits derive from customization to meet particular needs.
Customized options would permit more precise matching of hedges to
amount, timing, quality, and other commodity characteristics. The
White Paper additionally cites benefits from increased competition,
such as the potential increase of the supply and variety of
agricultural options and possible lower costs to users.

The White Paper suggests that the Commission should consider whether
to lift the ban subject to appropriate regulatory conditions. Three
categories of conditions are discussed in the White Paper: (1)
restrictions on eligibility of the parties; (2) restrictions on the
instruments and their use; and (3) regulations on the marketing of the
instruments.

Based on the White Paper, the Commission decided to seek public
comment on whether the Commission should lift the ban and, if so, what
regulatory conditions would be appropriate. A Federal Register
notice dated June 9, 1997, requested interested persons to address a
number of specific questions that would assist the Commission in its
deliberations on whether to issue a proposed rule to lift the ban on
agricultural trade options. A copy of the Federal Register
notice is attached to our testimony. Written comments are due to the
Commission by July 24, 1997.

The Commission has just completed two field meetings on the subject.
All five of the Commissioners attended the meetings in Bloomington,
Illinois, and in Memphis, Tennessee. The statements by interested
persons at the meetings were very thoughtful and informative. After
analyzing and considering all public comments, the Commission will
determine whether to propose a rule lifting the ban on agricultural
trade options. If it were to decide to do so, the proposed rule would
be published, and public comment on the proposal would be solicited
and considered prior to any decision whether to adopt a final rule.

The Commission is committed to considering this important issue
carefully in light of the history of options trading, the increasing
need for price risk management by agricultural producers, the views of
all interested persons and a thoughtful weighing of risks and
benefits. Thank you again for the opportunity to appear before you
today. The Commission looks forward to working with the Subcommittee
on agricultural trade options and other matters.